The economical crisis: is it really a crisis? What caused it? How can we extract ourselves from it? Let us be a little calm, cool, and collective about the multi-billion dollar questions. It seems like every little blip or incident sends the economy into a tail spin. How could a hurricane in the Gulf of Mexico cause long lines at the pump all over the South? How can less than 5% of the home mortgages going into foreclosure cause a financial collapse of world markets? They cannot. Not by themselves anyway.

One of the problems is that the world hates America but loves to trade with us. We are the only country that can innovate, develop, and inspire progress. Our economy is over 13.8 trillion dollars, making it the largest in the world by far. America’s economy is larger than those of the next four largest economies (Japan, Germany, China and United Kingdom) combined. Sure, they are growing, but the world is far behind us.

With all of their oil revenue, Saudi Arabia has only the 24th largest economy in the world, and Venezuela comes in 34th, at $228 billion per year. That is still a lot of surplus for these nations, and they certainly do not want to invest it within their own corrupt countries. Mexico receives $20 billion per year from illegals sending cash back to relatives. Yet when they go home to Mexico, they only have poverty to deal with.

Nevertheless, because we are an open society, most foreign nations and individuals can trade with and invest in America. So, wealthy business owners and foreign banks are heavily invested in our economy. We buy their oil, toys, cars, and clothing, and they take our money to buy crops, military hardware, and invest in our markets. It is the latter that is causing so many sleepless nights.

As India and China demanded more oil for their expanding economies and America refused to produced more domestically, investors began to “speculate” that prices would go up with the demand. So they invested heavily in the American market. At the same time, America’s lending institutions and banks, being encouraged by Congress, began to change their lending criteria and sold risky loans to the Fannie Mae and Freddie Mac companies who lobbied Congress for more risky loans. The more money they gave to Congress, the more support Congress gave them to make risky loans.

During this time something strange began happening in the western states. Many foreigners using fake ids (often from their own Consulates) began to buy homes with weak, unsupported loans. It was a boom business for all. As the dollar weakened, more overseas investments came into the market, creating more capital for the banks to lend. The explosive mixture was ready – all that was needed was the right spark.

First came the crack down on illegal immigration and the well publicized raids on businesses. Communities began to report the exodus of illegals back to their own countries and a decrease in the local work force. At the same time there emerged a noticeable increase in the foreclosure rate on homes. Those foreigners with fake identification had no reason to stick around; they were abandoning homes. It started in California and moved into Texas.

Gasoline hit around $4 a gallon in the U.S., and there was a revolt from citizens demanding more domestic production of oil. This had an immediate reduction in the price of oil and the speculators panicked. They moved their money out of oil, the price per barrel plummeted, and the foreign investors took their money out of the country. The dollar got stronger and banks started experiencing a “silent run” on bank accounts when large depositors began to take money out. The first cracks in the financial institution began to appear. Those “silent runs” were often foreign investors looking for better places for their money. Then the “panic” took hold and the U.S. Treasury asked Congress to inject 770 billion dollars of cash to be available to banks to lend out. Without the cash infusion banks could not lend and businesses could not pay monthly expenses.

Now that Congress has shown its willingness to support bad ideas and mistakes, State governments are standing in line for bailout money. The floodgates have been opened. The stock market will survive, but only after sanity returns.

2 thoughts on “Financial Crisis! This is why it happened.”

curiouslyinspired said:October 8, 2008 at 3:41 pm

Hello, can I introduce a slightly different twist to the story you write about here please?

Post the internet bubble bursting in 2000 and the tragic 9/11 events, the US Government was quite concerned about the impact on the US economy. So the interest rates were hugely reduced. I believe to 1%.

This had the effect that banks were not getting the savings inflow – as no-one wanted to save at a low rate, everyone was encouraged to spend. To generate cash which banks needed, they looked to create new financial products to sell. They started selling loans they had on their books, and then progressed to creating mortgage-backed loans and selling them on too.

Unscrupulous agents then started lending money to house-buyers who they knew could not ever afford to repay these mortgages, just because banks were so very hungry to buy mortgages of any quality, package them up as “securities”, and sell them on in increasing quantities to make loads of profit. The sub-prime market was born.

The market started collapsing a few years ago (there might be a link with the oil prices you write about, I have not thought this through yet) after sub-prime borrowers started defaulting on their debts in masses. Many were hit when the “introductory” rate of their mortgages increased to the standard rate. I am not sure they were all necessarily foreigners who were leaving the US – there would have been loads of US citizens amongst the unlucky failed borrowers.

By that stage the amount of bad loans previously sold to everyone across the world reached incredible quantities. Panic takes hold. The rest – we are living through the aftermath…